CREATIVE ACCOUNTING PRACTICES AND INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION IN NIGERIA: Listed Non-Financial Services Companies in Perspective.

1OKOUGHENU, Sunday Azeita (PhD, CNA) Igbinedion University Okada, Edo State, Nigeria. Email:azetasunny@gmail.com.08066918945.

2EVBOTA, Cephas Imuentinyan (B.Sc., M.Sc., PhD in View) Chukwuemeka Odumegwu University, Anambra State, Nigeria. Email: evbotacephas @gmail.com.07035003972 .

3AMUGHORO, Onome Austin (B.Sc., M.Sc., PhD in View) Nnamdi Azikiwe Unversity, Akwa, Anambra State, Nigeria. Email: amughoroaustin@gmail.com.08030501177.

AbstractThe study examined the relationship between creative accounting practices and international financial reporting standards adoption in Nigerian listed non-financial services companies for the year 2012-2017. The study adopted a quantitave research design. The strategy involved a panel regression and data were retrieved from the annual reports and accounts of the studied companies. Rregression was used to analysed the data and it was revealed by fixed effect regression model that IFRSs adoption had a positive and significant relationship with creative accounting practices in Nigerian listed non-financial companies at 1% level of significance.The study concluded that the adoption of IFRSs in Nigerian listed non-financial services companies cannot minimse creative accounting practices, but otherwise, it increased the practices due to the flexibility nature of the standards. Hence, the study recommended that companies should practice good corporate governance process to minimise creative accounting practices in Nigeria.

Keywords: Creative Accounting Practices, IFRSs adoption, Listed Non-Financial Services Companies

1. Introduction

In the contemporary times, the vigour of creative accounting practices has become an issue of great

global concern due to an unimaginable shock occasioned by it. The practice involves the manipulation

of records and financial statements by management tagged “window dressing”, “earnings

management”, “cosmetic accounting”, “income smoothing”, “innovative accounting” and “statement of

financial position engineering” to achiev a predetermine target (Sanusi & Izedonmi, 2014). Creative

accounting practices are characterised by excessive manipulation, complications and the uses of 'novel'

ways of reporting income, assets and liabilities (Umoren, Oyerinde, & Odeyayi, 2010). According to

Osaze (1998), creative accounting practices is the manipulation of normal accounting and financial

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statements by moving accounts around, changing their locations and subheads, redefining accounts and

even inflating accounts in order to present an attractive picture of the state of health of an organisation

or a rosier one depending on the objectives being pursued. Mulford and Comiskey (2011) summarised

the definition of creative accounting practices as any and all steps used to play the financial numbers

game, including the aggressive choice and application of accounting principles, fraudulent financial

reporting, and any steps taken toward earnings management or income smoothing.

Creative accounting in an unimaginable dimension has led to the fall of many well-known companies in

the world over. For instance, the fall of WorldCom, Enron BCCI, Barings, HealthSouth and Tyco in the

United States of America, where there was the tendency for new managers in these companies to show

losses due to poor management of previous operations (Odia & Ogiedu, 2013). In addition, in the

developing countries, for example, as at 2014, Nigeria banks such as First Bank, Guarantee Trust Bank,

Access Bank and Sterling Bank were found to have engaged in creative accounting in order to maintain

or boost the share price by reducing the apperent levels of borrowing, making the company appear

subject to less risk and falls, and to effect changes in accounting policies in order to discourage finding

faults in the company’s accounting system (Ijeoma, 2014).

1.2 Statement of the Problem

On the premise of the above background to the study, the gap in the body of knowledge this study

attempted to fill is that previous studies such as Barth, Landsman, and Lang (2008) have indicated that

because management has the discretion to choose accounting principles in preparing financial

statements, they take the advantage to engage in creative accounting practices. This fundamental

weakness was observed in the application of nation’s GAAPs and standards (such as, former statement

of accounting standards in case of Nigeria). This led many countries in the word including Nigeria to

adopt the new international standard called international financial reporting standards (IFRSs). Thus,

the adoption has attracted global research interest to examine wether creative accounting is been

practice under the IFRSs regime. Unfortunately, specifically in Nigeria, many of these studies focused

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on financial services companies or institutions neglecting the non-financial services companies or

institutions. For instantce, Osazevbaru (2012) examined creative accounting and firm’s market value in

Nigeria listed banks. Sanusi and Izedonmi (2013) investigated the reason for creative accounting in

Nigerian commercial banks. Adetoso and Ajiga (2017) examined creative accounting practices among

Nigeria listed commercial banks focused on curtailing effect of IFRS adoption. Thus, it is against this

backdrop this study aimed to examine the effect of IFRSs adoption on creative accounting practices in

Nigerian listed non-financial services companies.

1. Literature Review

2.1 Creative Accounting Practices

According to Kamau (2016) and Balaciu, Bogdan, Feleaga, and Pop (2014), the basic information

about creative accounting was brought up by Luca Pacioli, in 1494 through his seminer work on

Accounting, where he described creative accounting as an attempt to make figures more appealing or

otherwise to the eyes of the accounts’ readers. Therefore the practice of creative accounting has been in

existence for over 500 years and accountants have used the term, “cover up”, since then. In the 1920s,

during the introduction of corporate governance principles, creative accounting was considered as one

of the main reasons for the development (Kamau, Namusonge, & Bichanga, 2016).

Creative accounting practices have been defined by many scholars in various contexts. However, this

study adopted the definition by Sanusi and Izedonmi (2014) who described creative accounting

practices as the manipulation of records and financial statements by management tagged “window

dressing”, “earnings management”, “cosmetic accounting”, “income smoothing”, “innovative

accounting” and “statement of financial position engineering” to achieve a predetermined target. The

motive could be; when management performance tied with either cash or equity compensation (Javad

& Xia, 2015), to minimise the likelihood of violating debt covenants (Amat & Gowthorpe, 2010), to

reduce book value of profit before tax in order to pay less tax to governmen (Cotlet, Nagy, Megan, &

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Cotlet, 2012), to gain a favourable effect on share prices in stock market (Mulford & Comiskey, 2011),

and among other reasons.

To achieve these motives, Bhasin (2015) identified the following techniques; manipulation of

inventories (i.e, aggressive capitalization and extended amortization policies), using cookie jar reserves

(i.e, over-provisioning for accrued expenses when revenues are high, so that profits can be brought

down to a level that is safe to maintain in the future), big bath accounting (i.e, write-off as many costs

as possible in the current period, so that the future performance looks better), recognising premature or

fictitious revenue (i.e, recognition of revenue for a legitimate sale in a period prior to that called for by

GAAPs or recording of revenue for a non-existent sale), abuse of materiality concept (i.e, misusing the

concept of materiality by intentionally recording errors within a defined percentage ceiling), being

generous with bad debts (i.e, using personal judgement to either increase or reduce provision for bad

and doubtful debts), getting creative with the income statement (i.e, practice of communicating a

different level of earning power using the format of the income statement rather than through the

manner in which transactions are recorded) and problems with cash-flow reporting (i.e, reporting higher

and more sustainable cash flow).

2.2 IFRSs Adoption

Since the convengence from local standards to IFRSs, researchers have identified several benefits

countries will gain from the adoption of IFRS in different ways. Generally, IFRS was established to

harmonize the difference in accounting practices across the world by providing information that is

comparable, reliable, relevant, consistent, and which will reduce the cost of capital of transacting

businesses across borders (Adekoya, 2011). Adekoya (2011) and Sanyaolu, Iyoha, and Ojeka (2017)

pointed out that it would enable them to take advantage of the accounting standard published by

International Accounting Standard Board (IASB) to assist preparers of financial reports.

Udofia and Ikpantan (2015) found that the adoption of IFRSs in Nigeria would promote the compilation

of meaningful data on the performance of various reporting entities at both public and private levels

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thereby encouraging comparability, transparency, efficiency and reliability of financial reporting. They

further explained that a country that adopted IFRS would benefit assurance of useful and meaningful

decisions on investment portfolio, investors could easily compare financial results of corporation and

make investment decisions and there would be an attraction of direct foreign investments.

2.3 Review of Empirical Studies

Boumediene, Boumediene, and Nafti (2014) examined the impact of the adoption of IFRS on the

handling of accounting data in France. The study proxied earnings management as discretionary

accruals and adopted Jones modified model. The regression result indicated that the degree of earnings

management decreased in the period of adoption.

Klann and Beuren (2015) examined the impact of the International Accounting Convergence on income

smoothing in Brazil. It used the qualitative approach based on the model of Barth, Landman and Lang

(2008), which was taken from the financial statements of one hundred and thirty three (133) companies

in the period of 2005 to 2007 (Pre- IFRS) totaling 344 observations, while 106 companies in the period

of 2010-2012 (Post-IFRS) totalled 289 observations. The study used statistical techniques of

Multivariate, Linear Regression, F-Test and Pearson Correlation. The result indicated a rising in

income smoothing levels after convergence.

Bello, Abububaka, and Adeyemi (2016) investigated the effects of IFRS adoption on earnings

management of non-financial quoted companies in Nigeria. The study utilised a sample of seventy five

(75) non-financial quoted companies for the period of 2010 to 2014 and used regression analysis to test

the data. The result indicated that IFRS adoption in Nigeria did not significantly affects the tendency of

Nigerian companies to manipulate earnings. Specifically, the higher audit quality and large firm size

did not create a situation where IFRS adoption affected earnings management. This was contrary to the

general belief that IFRS, as high quality accounting standards would reduce the tendency for creative

accounting.

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Adeyemi (2016) investigated the effects of IFRS adoption on earnings management of non-financial

quoted companies in Nigeria. They used a sample of seventy five (75) non-financial quoted companies

in Nigeria that had consistently published their audited annual financial report between 2010 and 2014.

The study, in analysing the data collected, adopted descriptive statistics, correlation analysis and a

panel multiple regression data analysis to identify the possible effects of IFRS adoption on general

earnings management of the sampled companies. It found that IFRS adoption in Nigeria did not

significantly affects the tendency of Nigerian companies to manipulate earnings.

Okoro and Okoye (2016) examined IFRSs as a way of taming creative accounting as well as factors

that triggered unethical accounting practices in Nigeria. The study utilized structured questionnaires

that were administered to one hundred and twenty (120) professionals (auditors, investors,

stockbrokers). The Pearson product moment correlation statistical tool was used to analyse data and the

study found that IFRSs could be used to tame creative accounting.

Nnadi and Nwobu (2016) investigated the impact of IFRS adoption and banking reforms on earnings

management in Nigeria. The study comprised all listed commercial banks that operated in Nigeria and

taken 2013 as Pre-/Post-IFRSs Adoption period. In addition, the study adopted a pooled estimation

model and the results highlighted the mixed impact of IFRS adoption on earnings management but a

significant decrease in earnings management in the post CBN reforms.

Amidu, Yorke, and Harvey (2016) analysed the implications of the adoption of IFRS for accounting

information quality and tax avoidance in Ghana. The study drew its sample from non-listed firms in

Ghana Revenue Authority database for one hundred and nineteen (119) firms for the period after the

implementation and adopted Sun and Rath (2010), Rusmin (2010) and Dechow et al (1995) models to

estimate discretionary and total accruals. The study used auto correlation to analysed data and the result

indicated that the adoption of IFRS in Ghana led to a relative high quality of earnings and low

incidence of tax avoidance among firms.

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Based on the empirical literature reviewed, it is observed that controversial result existed on the

influence of IFRSs adoption on creative accounting practices. We therefore formulate hypothesis for

the study as followed:

H1: The relationship between IFRSs adoption and creative accounting practices in Nigerian listed

non-financial services companies is insignificant.

3. Methodology

This study adopted a quantitative research design and the strategy involves a panel regression. Its

justification for use in this study is supported by the recent study of Shahzad (2016), Kamau et al.

(2016), Kamau (2016) and Munene (2016) who used the design to estimate earnings management or

creative accounting and earnings manipulation.

The population of this study consisted of one-hundred and twenty nine (129) listed non-financial

services companies on the Nigerian Stock Exchange (NSE) as at 31st December, 2017. Each firm in the

population had annual reports for six consecutive years for the period of 2012 - 2017.

The sample size of the study is based on the total population of one-hundred and twenty nine (129)

listed non-financial services companies as at 31st December, 2017 on the Nigerian Stock Exchange

(NSE, 2012- 2017 Fact Sheet). To select the sample, the following restrictions were imposed: sampled

company must be listed each year over the period 2012 to 2017; the financial year end of the sampled

companies must be December, 31; the firm has published its complete financial statements for the six

years period from 2012 to 2017; to ensure some homogeneity of information, firms in banking and

insurance sectors are excluded and the shares of sampled companies must be actively traded in the

period under consideration.

In the light of the above considerations, this study therefore adopted Ewododhe’s (2011) formula and

computer-assisted random sampling technique to select the sample size of forty three (43) from total

population of the listed non-financial services companies in Nigeria. The data for the sampled listed

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non-financial services companies involves a secondary source. The researcher collected data from the

Nigerian Stock Exchange fact books and the companies’ annual financial reports.

The study therefor adopted panel data regression technique to analysed data. The choice of this method

is that it considered the cross-sectional and time differences of the sampled data. In addition, the

technique is premised on its property of increase data points and control for individual heterogeneity. In

all, the panel regression analysis captures the aforementioned characteristics by including the listed

company’s specific effects which may be random or fixed. The study used Hausman Test to select

between fixed and random panel data estimation techniques. The estimation results are evaluated based

on individual statistical significance test (Z-test) and overall statistical significance test (F-test). The

goodness of fit of the model was tested using the coefficient of multiple-determination (R-squared).

3.1 Model Specification

This study adopted the multiple regression model used by Kamau (2016) stated below:

CA= α + β1* MC + β2* CO + β3* TM + β4* SPP + β5*ID + ε

Thus, in specifying our unbalanced panel regression model, we included cross sections (companies) and

year dummies (2012 - 2017) in the unbalanced panel regression models. The panel multiple regression

model with an error term ( t ) is specified as shown in equation “1” below:

CA=α+β1IFRSsit+εit…………………………… (1)

Where;

CA= Creative Accounting Practices

IFRSs= International Financial Reporting Standards Adoption

β = Variables that vary across companies but do not vary over time

t = Variables that vary over time but do not vary across companies at any given time

it = Error terms over the cross section and time.

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Thus, in applying the regression analysis to examine the regression equation “1” above, the following

hypothesis was tested:

H0: βiz = 0

H1: βiz ≠ 0

Rejection of H0 and acceptance of H1 at the 1% and 5% level of significance confirms the existence of

a moderating (interaction) effect.

3.2 Measurement of Variables

Dependent Variable: The dependent variable in this study is creative accounting practices (CA). This

is measured as change in profit margin (∆PMt) divided by change in asset turnover (∆ATOt) (Jansen,

Ramnath, & Yohn, 2012).

Independent Variable: The dependent variable in this study is IFRSs adoption. This is measured as

dummy variable which is equal to “1”.

4. Data Analysis and Discussion of Findings

4.1 Regression Results

To examine IFRSs adoption has significant effect on creative accounting, we used a balanced panel

data regression analysis to test our formulated hypotheses. This is showed in Table 1 below:

Table 1: Balanced Panel Regression Results

Expected

Sign

Fixed

Effect Model

Random

Effect Model

C -6.23

(-2.01)

[0.00]***

-4.00

(-1.10)

[ 0.00]***

IFRSs Adoption - 0.04

(2.20)

0.01

(1.20)

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[ 0.00]*** [ 0.02]**

R-SquaredAdj-R-SquaredF-StatisticDurbin WatsonHausman TestN(n)

0.1521000.1203111.20 (0.00)1.999111 30.01(0.00) 43 (6)

0.1333410.1281101.11 (0.00)2.020221 -43 (6)

Note: (1) Parentheses ( ) are t-statistic while bracket [ ] are p-value, *** for 1%, ** and for 5%

Source: Researcher’s Compilation (2018) through Eview Software, 8.0 Version.

In testing the significant relationship between the dependent and independent variables, the two widely

used balanced panel data regression models (fixed effect and random effect panel data estimation

techniques) were estimated. The difference in the models was based on the assumptions made about the

explanatory variable and cross sectional error term. Table 1 presented two balanced panel data

estimation techniques (fixed effect and random effect panel data estimator). The results revealed a

difference in their coefficients magnitude signs but did not necessarily change the number of

insignificant variables. In selecting from the two balanced panel data models, the Hausman Test was

conducted and the result is presented in Table 2 below:

Table 2 Hausman Test

Correlated Fixed Effects - Hausman Test

Equation: Untitled

Test cross-section fixed effects

Test Summary

Chi-Sq.

Statistic Chi-Sq. d.f. Prob.

Cross-section fixed 30.010300 1 0.0000

** WARNING: estimated cross-section fixed effects variance is zero.

Cross-section fixed effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

IFRSs Adoption 0.000005 -0.000002 0.000000 0.0507

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Source: Researcher’s Compilation (2018) through Eview Software, 8.0 Version

The result from Table 2 clearly showed that we should accept H1 (fixed effect model) and reject H0

(random effect model) because of the significance of the Hausman test (0.0000). It means that we

should adopt the fixed effect panel multiple regression results in our analysis. It was observed from the

fixed effect panel multiple regression results that the R-squared and adjusted R-squared values are

0.152100 and 0.120311. It indicated that all the independent variables jointly explained about 15% of

the systematic variations in creative accounting across the listed firms sampled in this study over the

six-year period (2012-2017). The F-statistics value of 1.220 and its p-value (0.00) showed that a

significant linear relationship existed between the dependent and independent variables. Also, the

Durbin-Watson statistic of 1.999111 is very close to 2.00 and indicative of the absence of the problem

of multicollinearity in the regression variables.

In Table 1 above, it should be noted that fixed effect multiple panel regression models provided

IFRSs adoption had a positive effect on creative accounting (CA=0.04). The positive coefficient value

therefore, implies that the more companies comply with the standards (IFRS), the more they engage in

creative accounting practices and it would be statistically significant. The significance of the variable

was because it passed the individual test of significance at 1% level.

4.2 Test of Hypothesis

Hypothesis 1 Restated: The relationship between IFRSs adoption and creative accounting practices

in Nigerian listed non-financial services companies is insignificant.

The result reported that IFRSs adoption was positive and significantly related to creative accounting

practices at a t-value of 2.20 and a probability value of (0.00) ¿ P = 0.01 at the 1% level of significance.

The implication of the result is that the positive coefficient value (CA=0.04) implies that an increase in

compliance with the standards (IFRSs) would lead to an increase in creative accounting practices. The

result is also significant at the 1% level. Hence, the null hypothesis that the relationship between IFRSs

adoption and creative accounting practices in Nigerian listed non-financial services companies is

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insignificant could not be accepted. The result is not at variance with the apriori positive and significant

relationship.

4.3 Discussion of Finding

IFRSs adoption was measured as a dummy variable which was equal to ‘1’ indicated that all listed

companies used as sample in the study have adopted IFRSs. The relationship between the explanatory

variable IFRSs adoption and creative accounting practice was positive. It presupposed that IFRSs

adoption increased creative accounting practice and was statistically significant.

The result collaborated with the position of Klann and Beuren (2015) who found a significant

relationship between IFRSs adoption and creative accounting practice in Brazil. The result is however

not consistent with the position of Bello et al. (2016) who found an insignificant relationship between

IFRSs adoption and creative accounting practice in Nigeria.

5. Conclusion, Recommendations and Contribution to Knowledge.

5.1 Conclusion

Based on the finding discussed above, the study therefore concluded that the relationship between

IFRSs adoption and creative accounting practices in Nigerian listed non-financial services companies is

positve and significant. In addition, the reason for the positive and significant relationship between

IFRSs adoption and creative accounting practices could be because of the flexibility nature of the

standards.

5.2 Recommendations

Following the empirical findings on the relationship between IFRSs adoption and creative accounting

practices on listed non-financial services companies in Nigeria, the study recommends that a good

corporate governance process should be embraced by the companies to minimise creative accounting

practices by management in Nigeria.

5.3 Areas for Further Research

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There are several recommendations that can be made for future research in the field of creative

accounting. First, this study does not employ causality tests. Therefore, the findings only provided

evidence for associations rather than causality. The study suggests that future research in the field of

creative accounting could employ causality tests in order to not only examine the associations between

these variables, but also identify causality. This would also strengthen the theoretical arguments and

justifications for these associations.

Finally, data collected from the financial statements of the sampled companies in this study were not

adjusted with inflation. Assuming they were adjusted, they may yield different results. Therefore,

future research in the field of creative accounting could consider financial statements where data are

adjusted with inflation.

5.4 Contribution to Knowledge Gap

Since countries have adopted IFRSs, many researchers have examined it impact on creative accounting

practices. However, specifically in Nigeria, many of these studies focused on financial sector or

institutions neglecting the non-financial sector or institutions. This study therefore contributed in

filling this knowledge gap in literature by suggesting empirical evidence on the determinants of creative

accounting practices in the Nigerian listed non-financial companies under the news standard (IFRSs)

regime.

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